Daniel Tenreiro’s recent review provided us with a succinct guide to all of the ways in which a coronavirus epidemic could negatively affect the United States economy. However, there is one more area that needs to be discussed. While most of the items he mentioned were associated with the possibility of a negative supply shock, the repercussions reach much further.
There are few analysts that are stopping to consider the possibility of a negative demand shock. If supply chains are disrupted and the economy’s natural interest rate is reduced, the Federal Reserve could be forced to act. Let’s say that the Federal Reserve decides against the idea.
From there, things could get very dicey. Monetary policy will be tightened in an inappropriate manner. This is considered to be a second-order economic effect but it could actually cause more problems than a first-order economic effect would. Monetary policy has a compounding effect when an epidemic takes place and preparation is key.
When these types of occurrences take place, the prices of various items are going to rise but the gross domestic product will only continue to plummet. Monetary policy is not able to fix a problem of this nature and in most instances, it is only going to serve to make it far, far worse.
The United States economy may not be doomed because of the coronavirus but it is a situation that is definitely worth monitoring. There are some who believe that these types of conversations are merely a form of fear-mongering. Unfortunately, nothing could actually be further from the truth.
If the United States does not remain aware of the potential dangers that are associated with an epidemic (from an economic standpoint), the nation could be left flatfooted. There are major concerns that are associated with manufacturing supply chains. If these chains are disrupted in any sort of meaningful way, guess what happens next?
Investment will cease almost immediately. Once these monies are no longer flowing in the manner that the market has become accustomed to, the issues are too much to be ignored. The interest rate becomes depressed in such a way that the economy is bound to be affected. The Federal Reserve would be left with a terrible choice to make.
They would be asked to cut their target interest rate. At that point, the American worker is affected. Those who reside in areas that are not affected by the epidemic would start to lose their jobs. If demand is starting to decrease, that means supplies will also need to decrease. This is what has American workers of all types extremely worried.
You do not have to reside in an area that is directly affected by the coronavirus to experience financial difficulties. Unfortunately, monetary policy does not have the ability to rescue the economy at times like these. On the other hand, monetary policy does have the ability to seriously hurt the economy in a number of ways.
The damage could be amplified tenfold, according to expert analysts. The NGDP growth rate will slow sharply and the damage to the economy would be tough to recover from. No one actually knows if the coronavirus epidemic is going to do real damage to the United States economy. It is a tough thing to predict and the last time we checked, no one actually has a crystal ball.
Conversely, the Federal Reserve could take certain steps to address the problem but in all likelihood, they would simply allow the growth of NGDP to slow. The Federal Reserve already has a reputation for being squarely behind the curve and until they are able to disprove it, this perception will continue to dog them.
The Federal Reserve has done its best in recent years and this is not meant to be overly critical. It’s simply something that bears monitoring in the months to come. There are ripple effects that we cannot see coming. For starters, the 2020 Summer Olympics are slated to take place in Japan. What happens if the coronavirus leads to a cancellation? The economic effects that are associated with this potential decision could be far-reaching.
It just goes to show that there is a lot that we do not know yet and that there is much to be learned. We can all do our best to try and predict the future but no one can truly know what comes next. All we can do is try our absolute best to be as prepared as possible. This is an epidemic that all Americans need to be keeping a closer eye on.